Cypress Semiconductor Corp. v. Maxim
Integrated Products
In Cypress
Semiconductor Corp. v. Maxim Integrated Products, 236 Cal. App. 4th 243
(6th Dist. 2015), the California Court of Appeal, Sixth Appellate District
found that a defendant in a trade secrets suit can be deemed a “prevailing
party” entitled to attorney fees
under California
Civil Code § 3426.4 when a plaintiff voluntarily dismisses its lawsuit to
avoid an adverse determination on the merits. Although attorney fees provisions
in contracts are governed by California
Civil Code § 1717—which defines “prevailing party” in a manner that excludes voluntary dismissal without prejudice as a basis for finding prevailing party
status—attorney fees awarded per statute are not subject to § 1717. Cypress clarified that, at least under § 3426.4, prevailing party status can be found
following a voluntary dismissal without prejudice.
Plaintiff Cypress sued defendant Maxim, alleging that Maxim had misappropriated a
trade secret, or was in the process of doing so, by seeking to hire away
specialists in touchscreen technology. Cypress and Maxim compete in the field
of touchscreen technology. Maxim responded that it was entitled to solicit
prospective candidates from Cypress’ workforce and that there was no evidence
it acquired, or sought to acquire, any trade secret. Cypress tried and failed
to secure temporary injunctive relief, and failed to obtain an order placing
under seal evidence derived by Maxim from public sources. Cypress then
dismissed the action. The trial court awarded Maxim attorney fees pursuant to § 3426.4, which authorizes such an award to the prevailing party where a claim
for misappropriation of trade secrets is found to have been made in bad faith.
On appeal, Cypress argued that the
trial court erred because it could not properly find that Maxim was the
prevailing party, or that Cypress brought the action in bad faith. The court
found that (1) the trial court’s findings are free of procedural error; (2) the
finding of bad faith is supported by evidence that defendants merely attempted
to recruit a competitor’s employees, which Maxim was entitled to do under
California law; and (3) Maxim prevailed when, as the trial court implicitly found on substantial evidence, Cypress dismissed the suit to avoid an adverse
determination on the merits. As the court explained, “At the core
of the case was Maxim’s right to solicit Cypress employees.”
Because litigation often ends in mixed
results, identifying the prevailing party is not always straightforward. Cypress
argued, unsuccessfully, that the lower court erred when it deemed Maxim the
prevailing party because it was required under California law to determine
whether Maxim had prevailed “on a practical level” ; citing Heather
Farms Homeowners Assn. v. Robinson, 21 Cal. App. 4th 1568 (1st Dist.
1994). The court noted that while some decisions have interpreted different statutes awarding attorney fees to prevailing parties by deciding whether they
had prevailed “on a practical level,” it found that those cases were implicitly
concerned with the risk that a mechanical definition of prevailing party would
produce arbitrary or inequitable results where the party seeking fees had
achieved only a “superficial or illusory success.” Here, specifically
interpreting § 3426.4, the court reasoned that because the legislature showed “manifest legislative intention” to avoid imposing the costs of defense of
suits brought in bad faith on defendants, § 3426.4 warrants a liberal construction
of prevailing party, “trusting in the 'bad faith’ requirement to filter out
doubtful cases.” Put another way, the court found that in ruling on motions for
attorney fees under § 3426.4, trial courts should direct their inquiry to the
bad faith requirement. Following Cypress, trial courts arguably no
longer need to consider whether defendants prevailed on a “practical level” before awarding fees under § 3426.4 as long as defendants show that plaintiffs’
allegations were brought in bad faith.
The court, however, did not solely
rely on § 3426.4’s liberal construction and bad faith requirements. Instead,
the court found that even under the general standard favored by Cypress, Maxim
prevailed “on a practical level” because Cypress’ complaint was “meritless on
its face, based upon theories of liability that were not merely specious, but
nonsensical.” The court went so far as to characterize Cypress’ argument
as “a kind of carnival fun house in which the facts of the case are distorted
into grotesque and nearly unrecognizable shapes,” adding that Cypress “gained
no legitimate benefit from the action, practical or otherwise.” The court
acknowledged that Cypress, at most, “succeeded in notifying the labor
marketplace that it would resort to spurious litigation to prevent poaching” of
its employees, but found that because this objective “is contrary to
California law and policy,” its achievement “cannot be considered the kind of
success that will sustain prevailing party status, or prevent an opponent from
acquiring that status, under § 3426.4.”
The extreme facts here suggest that
future litigants will attempt to distinguish Cypress by arguing that
their own allegations did not match those in Cypress. Indeed, the court
arguably set a high bar when it found that “[t]he only plausible explanation
for Cypress’ dismissal of the action is that it feared a determination on the
merits.” Regardless, defendants in trade secrets suits who successfully
persuade plaintiffs to voluntarily dismiss their complaints should consider
moving for attorney fees if they can credibly argue that the plaintiffs’
complaint was brought in bad faith and plaintiffs dismissed the lawsuit to
avoid an adverse determination on the merits. Indeed, defendants now have an
additional lever to pull in settlement negotiations: defendants can agree not
to file a motion seeking attorney fees (which are expensive to file or oppose)
in exchange for more favorable terms from plaintiffs. By the same token,
plaintiffs should insist on settlement terms that preclude defendants from
seeking attorney fees before voluntarily dismissing a trade secrets action in
California.
When
Is a Claim Brought in Bad Faith Under § 3426.4 of the California Civil Code?
Although the Legislature has not
defined “bad faith’” for the purposes of § 3426.4, courts have developed a
two-prong standard: (1) objective speciousness of the claim, and (2) subjective
bad faith in bringing or maintaining the action, i.e., for an improper purpose. See FLIR
Systems, Inc. v. Parrish, 174 Cal. App. 4th 1270, (2d Dist. 2009).
Objective
Speciousness
The court reaffirmed that a defendant
moving for attorney fees under § 3426.4 is not required to conclusively prove a
negative (i.e., that they did not
steal the plaintiff’s trade secrets). Instead, under the “objectively specious” standard, it is enough for defendants to point to the absence of evidence of
misappropriation in the record. The court looks first to materials that
plaintiff puts in the record through the complaint and any related materials.
Here, the court found sufficient
evidence of objective speciousness, calling the complaint “a model of evasive,
equivocal, and circumlocutory pleading.” Indeed, the court rejected Cypress’
two theories of liability—that Maxim was using trade secrets to identify Cypress’ “touchscreen employees” and that Maxim was attempting to hire these employees
for the purpose of gaining access to trade secrets they had learned in their
work for Cypress—and found that the manner in which they were pleaded “strongly suggests that Cypress never had any evidence to support either of
them.”
First, the court found that Cypress’
allegations relating to Maxim’s alleged use of Cypress trade secrets to
identify Cypress employees with knowledge of touchscreens was entirely speculative,
and that Cypress itself appeared to acknowledge in the complaint that Maxim
compiled the list of Cypress employees on its own.
Second, the court found Cypress’ claim
that Maxim was seeking to hire Cypress employees so that it could then pick
their brains for trade secret information amounted to a claim for threatened
misappropriation. Despite Cypress’ efforts to disclaim reliance on the doctrine
of inevitable disclosure (which has repeatedly been rejected in California),
the court found that “the complete absence of any coherent factual allegations
suggesting a threatened misappropriation, Cypress’ second theory of relief was
an inevitable disclosure claim, or it was no claim at all.” Cypress serves as a reminder that where
plaintiffs’ allegations suggest concern over future misappropriation or misuse
of trade secrets, defendants should consider framing plaintiffs’ allegations as
improper attempts to rely on the doctrine of inevitable disclosure.
Subjective
Bad Faith
The court heard and rejected a number
of procedural challenges brought by Cypress regarding the subjective prong of
the bad faith analysis. Most significantly, Cypress argued that the trial
court’s judgment should be overturned because the trial court did not find that
Cypress lacked a subjective belief in the merits of its case. The court
rejected Cypress’ argument, reasoning that if the trial court finds a claim is
objectively specious, and that the plaintiff made it for an improper purpose, “there is no further requirement that the court also find a lack of subjective
belief in the merits of its case.’” Here, evidence of improper purpose
included: parties’ pre-suit correspondence that suggested Cypress’ goal was to
scare Maxim away from attempting to hire any of Cypress’ touchscreen employees
under any circumstances; Cypress’ failure to identify its trade secrets as
required by § 2019.210; Cypress’ failure to respond to discovery requests asking Cypress
to identify allegedly confidential information; Cypress’ failure to timely
inform Maxim that it would dismiss the suit; and Cypress’ efforts to seal a
compilation of publicly available Cypress information prepared by Maxim.
Notably, Cypress risks creating
some confusion regarding the necessity of proving plaintiffs’ lack of
subjective belief in the merits of their allegations. Although the court
explained that “the test is not what the plaintiff believed about its
objectively specious claim, but for what purpose it pursued such a
claim,” it acknowledged that “a genuine belief that one’s claim has merit tends
to show that it is being pursued for the proper purpose of vindicating a legal
right honestly believed to have been infringed.” The court’s effort to
reconcile these statements—i.e., explaining that “it does not
follow, and is not the case, that a subjective belief in the merits will bar a
fee award where an objectively specious claim is found on substantial evidence
to have been maintained for an improper purpose” —risks eviscerating the
subjective prong by suggesting that when substantial evidence of an objectively
specious claim is found, courts can ignore a plaintiff’s subjective intent. Following Cypress, and in light of the difficulty of proving subjective intent
through evidence, defendants seeking attorney fees should emphasize the lack of
substantial evidence in support of a plaintiff’s allegations over the plaintiff’s
subjective intent.
Can
Failure to Comply With § 2019.210
Lead to Inference of Bad Faith?
Although not expressly directed at § 2019.210 of the California Code of Civil Procedure, Cypress nonetheless
impacts defendants’ ability to insist on a clear identification of trade
secrets early in litigation. The court found an inference of “dilatory and
oppressive intent” as a result of Cypress’ “belated and evasive response to
Maxim’s demand for specification of the trade secrets at issue.” Relying on Perlan
Therapeutics, Inc. v. Superior Court, 178 Cal. App. 4th 1333 (4th Dist.
2009), the court found that Cypress was not entitled to describe its trade
secrets so vaguely as to amount to an “open-ended work in progress.” Cypress thus strengthens defendants’ ability to insist on a detailed § 2019.210
disclosure by making it clear that a failure to comply with the statute could
result in an inference of bad faith that could trigger the award of attorney
fees.
Conclusion
By making it easier for trade secrets defendants to recover
attorney fees under § 3426.4, Cypress should discourage some plaintiffs
from filing baseless complaints and strengthen defendants’ ability to settle
cases early before spending too much on fees.